Many grandparents wish to leave money to their grandchildren when they pass. However, few leave specific instructions on what to do with their money and possessions, leading to potential legal challenges and personal heartache after their deaths. John J. Roe III, a partner who concentrates his practice in wills and estates, with the Long Island Law Firm of Taroff and Taitz, LLP, has seen this all too often. “In the State of New York, children under the age of 18 are considered minors in the eyes of the law. Courts are obligated to protect their interests and sometimes they step in and inadvertently prevent minors from realizing the gifts bestowed by their loved ones.” Roe has developed list of Do’s and Don’ts for Leaving Gifts to Minors to help guide grandparents with estate planning.
The biggest mistake, according to Roe, is parents or guardians attempting to use funds earmarked as gifts for child support or college funding. “The Courts have generally held that it is the responsibility of the parent or guardian to support the child and, thus, the funds left by a grandparent cannot be used for that purpose. The funds given to the grandchild must be delivered intact once the grandchild reaches the age of majority.”
Do’s and Don’ts for Leaving Gifts to Minors “As with any legal decision, we recommend that you speak with your attorney and accountant,” says Mr. Roe. “However, the suggestions below will offer some guidance and things to think about when making will and estate planning decisions.”
Do appoint a parent to act as guardian. In a will, a grandparent can appoint a grandchild’s parent as the guardian to receive money on behalf of the child. If the grandchild lives in another jurisdiction, the will must be admitted in that jurisdiction in order for the selected parent to be appointed as guardian. Also, the gifts intended for the grandchild could be taxed to the parent if the parent dies unexpectedly.
Do make a gift with the Uniform Transfers to Minors Act (UTMA). UTMA allows a grandparent to delay the distributions of the proceeds of a gift until his or her grandchild reaches the age of 21. Choosing a custodian is critical. The custodian must resist the temptation to disburse funds early based on the request of a parent.
Do keep good records. When making requests to withdraw funds belonging to a minor, the Courts look at financial records kept by the persons who are in charge of the money. Without proper receipts and a list of proposed expenses, withdrawals are routinely denied. Acting inappropriately will result in the Court requiring the custodian or guardian to repay the money to the account being held for the minor. It is also possible that the Court can remove a guardian for misfeasance and improper use of these funds.
Do make use of the “Annual Gift Tax Exclusion.” Either grandparent can add up the number of grandchildren and the amount of each gift and make a specific provision in his or her Will leaving that sum of money to the surviving spouse. Because that gift is sheltered by the marital deduction, it will escape estate tax. After the grandparent’s death, the surviving grandparent can make gifts to the grandchildren. “For example, a surviving grandmother may use her husband’s annual gift tax exclusion during the year of his death to transfer assets to their grandchildren, thus doubling the gifts available to each grandchild,” says Roe. “This avoids the use of guardianships, ancillary probate of a Will in another state, and still carries out Grandpa’s wishes.”
Don’t name a minor as a life insurance policy beneficiary. It may seem like a safe idea to name a young child as a life insurance beneficiary with the thought that they will be much older when the life insurance proceeds are needed. But if the benefactor dies while the child is too young to access the policy, it can cause undue hardship.
“I know of one case when a young father named his five year old daughter as the beneficiary of his life insurance policy,” says Roe. “On the father’s sudden death, the child’s mother was denied access to the life insurance proceeds. The Court did grant permission to the mother to withdraw funds, but reminded her that it was her own obligation to support her daughter. The family suffered great hardship because of the inappropriate listing of a child as the life insurance beneficiary.”
Don’t raid the cookie jar. Well meaning parents often invade funds set aside by a grandparent for a grandchild without first receiving Court permission. “By failing to obtain permission to access funds, parents can incur the wrath of the Court, since it is the obligation of the parent to support the child,” says Roe. “It could prove embarrassing should the Court require the parent to pay back a child’s money.”
“Gifts to grandchildren can be fraught with difficulties. The best thing to do is seek out an estate planning attorney who has experience in these matters in order to avoid issues following a grandparent’s death,” says Roe.
About Taroff & Taitz
Taroff & Taitz, LLP provides a wide variety of legal services to Long Island. Our attorneys have served the residents of Suffolk County for more than two decades. Comprised of attorneys, legal assistants and administrative staff, the firm provides support at various levels of legal expertise. Our resources are available to both businesses and individuals looking for experienced legal representation. The firm’s primary areas of concentration include civil litigation, creditor’s rights law, trust and estates issues, estate planning, admiralty claims, business counseling and real estate matters. For more information, please call 631-475-4400.